Wal-Mart's China syndrome a symptom of international woes

Employees
stand in front of the gate to a Wal-Mart Supercenter in Chongqing
municipalityThomson
Reuters

By Nandita Bose and Adam Rose

MUMBAI/BEIJING (Reuters) - Wal-Mart Stores Inc, famed for its low
prices, has stumbled in the one major market where consumers say
price is less of a driver in their buying decisions: China.

There, consumers say they want food that is safe and authentic,
and, after 17 years, Wal-Mart is changing its approach, closing
some big-box stores that never quite caught on with locals.
Instead, it's focusing on private-label products and imports,
putting its stamp on quality and safety.

"We're closing some stores because we got enamored with growth,"
said Raymond Bracy, head of corporate affairs at Walmart China.
"We're not going to do that again. We're focusing on quality
first."

Getting China right is crucial for Wal-Mart's international
ambitions. The world's largest retailer ranks third in China
behind Sun Art Retail Group Ltd and state-backed China Resources
Enterprise Ltd, according to Euromonitor. Brazil and India are
proving challenging, too.

"If you went out and asked members or customers, 'What's your
single biggest worry?' they'll tell you trust and authenticity,"
said Greg Foran, who took over as Walmart China CEO in 2012.
"Once you've got their trust, the next question they ask
themselves is, 'How much is it?'"

Walmart International, which contributes less than a third of net
sales, has suffered from aggressive expansion and is a big
concern for new CEO Doug McMillon, who previously led the
international unit.

The retailer on Thursday forecast lower full-year profit than
analysts had expected for fiscal 2015. Walmart International net
sales in the fourth quarter dipped 0.4 percent to $37.67 billion,
and November-January operating income fell 45.8 percent, hit by
store closures in Brazil and China and a charge related to
terminated agreements in India.

"We have initiated actions in Mexico, Brazil and China to improve
our operating performance and this is a priority for fiscal
2015," David Cheesewright, president and CEO of Walmart
International, said in a statement.

Foran told reporters during a December tour of Sam's Club stores
- where members bulk buy - that Wal-Mart aims to have private
labels make up a fifth of its China sales within the next decade,
up from less than 1 percent now. Private labels typically price
at 10-40 percent below local brands, but profit margins are
higher for the retailer. They make up close to half of sales in
Britain.

Bracy said the retailer is rationalizing its supply chain in
China and building its own distribution centers to manage
quality, while also lowering costs. "Our costs have come down so
much on pork that people ask us, 'Gee, is it too low?' They
wonder, 'Is it legitimate? Can we trust it?'" he said.

On an annual basis, Walmart International's revenue growth last
fiscal year was the slowest in four years.

MIXED MESSAGES

Chinese consumers seek out large foreign brands for reliability
and quality, said James Roy, an associate principal at
Shanghai-based China Market Research. "Yet they're seeing mixed
messages from Wal-Mart because they have tried to sell the 'every
day low prices' concept and Chinese consumers equate 'every day
low prices' with being cheap and not very safe."

Wal-Mart has previously exited markets such as Germany and South
Korea where it's cheap prices and large stores model failed to
work, but it has stuck it out in China, the world's
second-largest economy, for nearly two decades, struggling with
its brand positioning.

Its international business has been under the spotlight after it
was accused in 2012 of bribery in Mexico, its biggest business
outside the United States. It later launched graft probes in
China and Brazil and in India, where the investigation hit its
first-mover advantage in a $500 billion market.

The graft has less of an effect on the business in China, but
food safety scandals - from fatal tainted milk to recycled
'gutter oil' used for cooking - have hurt it. In January,
Wal-Mart recalled its popular "Five Spice" donkey meat after
tests showed traces of fox meat.

Food, especially fresh produce and meat, is an acknowledged
traffic driver for Chinese hypermarkets, making it a bigger part
of the retail equation than elsewhere. "That's the most
fundamental thing about getting food right," said Bracy. "If you
... say, 'I'm not satisfied with the quality,' then you may go to
another store. So we lose not just the food purchase, but also
the jean purchase."

Just to make things tougher, though, Chinese "will walk a block
to save 1 renminbi on a kilo of rice," said Bracy.

Wal-Mart's share of China's hypermarket segment dropped to 10.4
percent last year from 11.3 percent in 2008. It was overtaken as
market leader in 2009 by Sun Art Retail, which is now tied for
first place at 14 percent with CRE, according to Euromonitor,
whose data indicates that hypermarkets make up 15 percent of
China's grocery retail market. Wal-Mart's grocery retail value in
China has grown 50 percent since 2008.

Even as it plans to open 110 new stores by 2016, Wal-Mart has
announced the closure of at least 29 stores in China.

"For the first year a lot of my attention, and my team's
attention, has been focused on just getting the foundation fixed,
sorting out what stores we need to exit, being much more clever
about where we're going to open stores," Foran said.

BIG ISN'T ALWAYS BEST

Chinese customers prefer small neighborhood stores, where they
don't have to travel far and can buy just a few items per visit.
It's a similar picture in Brazil, where market leader Grupo Pão
de Açúcar (GPA) better serves local customers' preference for
smaller convenience stores. GPA also appealed to Brazilians'
desire for special deals with limited duration, heavily
advertised promotions.

The big box store model has been a costly mistake in terms of
real estate losses for Wal-Mart, said Stephen Springham, senior
retail analyst at Planet Retail in London. As more Chinese opt to
shop online, the U.S. firm acquired web retailer Yihaodian in
2012, which claimed 24 million online users last October.

China, though, will be a slow turnaround for Wal-Mart, said
Himanshu Pal, director of retail insights at London-based Kantar
Retail. "They are not able to invest as much as they should
because shareholders are not as patient as they used to be,
especially with U.S. and European markets not doing very well."